California lawmakers angrily demand fixes at unemployment agency after scathing audits
California lawmakers on Wednesday demanded quick fixes to the state unemployment benefits system a week after two scathing state audits found poor planning and ineffective management caused significant delays in payments to people left jobless during the COVID-19 pandemic.
The calls for swift action during a state Capitol oversight hearing came as many officials are also sounding the alarm that Californians whose identities were stolen as part of unemployment fraud schemes will need immediate help from the state Employment Development Department to avoid tax liability on the benefits wrongly paid to others in their names.
More than a dozen lawmakers from both houses participated in Wednesday’s four-hour hearing by the Joint Legislative Audit and Assembly Insurance committees, at which State Auditor Elaine Howle outlined problems identified by her audits of the EDD.
Assemblyman Rudy Salas (D-Bakersfield), chairman of the audit committee, called the findings “disturbing.”
“Californians are frustrated, they are infuriated, they are fed up. They want a system that works for them,” Salas said during the hearing.
Four lawmakers, including Assemblyman Mike Gipson (D-Carson), said they have constituents living in their cars, some of them with children, because of delays in receiving unemployment benefits.
“It is inexcusable,” said Gipson, his voice booming with anger.
The audit noted that in May 2020, the Employment Development Department was warned that California was likely to see $1.2 billion in potential fraud.
Sen. John Laird (D-Santa Cruz) said he knows of a woman who has a doctorate degree and is living in her car, which itself is in danger of being repossessed because she is short of money.
“The audit that we have before us on the performance of California’s unemployment department is simply damning, there is no other way to describe it,” Laird said.
Howle laid out a series of recommendations that include developing better tools for processing claims and stopping fraud, and expediting reviews of 1.4 million claims suspended in December pending investigation of potential fraudulent activity. The auditor also said the EDD needs to increase staffing at call centers and improve training so those answering calls can resolve problems with claims.
EDD Director Rita Saenz, who took over the agency Jan. 1 from retiring director Sharon Hilliard, told the legislators she supports implementing recommendations as quickly as possible.
“Obviously, what we have heard today is very sobering, and I and our executive team take all of these recommendations seriously,” Saenz said. “Mistakes have been made. They have got to be rectified.”
The state auditor’s report was ordered by lawmakers who criticized California’s unemployment agency for a backlog of claims and failing to prevent widespread fraud.
Lawmakers are also concerned that some unemployed people have been overpaid by EDD and may have to return the money, but EDD officials said repayments may be waived if a claimant can show economic hardship.
Laird noted that EDD’s problems with approving benefits without delay were identified more than a decade ago.
“This is an issue that has spanned the administration of three governors of both parties,” Laird said. “But it is up to us now to make sure these problems are corrected.”
Meanwhile, nine Senate Republicans have sent a letter to Gov. Gavin Newsom asking for action to assist Californians who have had their identities stolen by fraudsters seeking unemployment insurance benefits and may now face tax liabilities.
California’s unemployment agency was not prepared for the COVID-19 pandemic, an emergency state audit confirmed this week. Many of its issues with processing claims have been ignored for more than a decade.
The state has estimated that more than $11 billion in unemployment benefits were paid to fraudulent claims in California. Saenz told legislators Wednesday that some 130 people have been arrested so far in fraud cases.
The EDD said it is mailing federal tax forms to 7.8 million individuals this month to notify them of benefits collected, more than five times the usual number distributed.
“As we enter the tax filing season, many Californians will be surprised to learn that they have tax liabilities for UI benefits that were fraudulently claimed in their name,” the senators wrote. “This is because 1099-G forms will soon be arriving in the mailboxes of taxpayers who were victims of identity fraud.”
Under federal law, unemployment benefits are taxable income.
The senators said many fraud victims may not know about the tax liability because EDD is mailing tax forms to the most recent addresses of record, which the lawmakers say are the ones fraudsters used to obtain UI benefits. Howle also told lawmakers Wednesday that some people don’t know yet that their identities were stolen to apply for unemployment benefits.
“Individuals are going to be shocked by that and reaching out” to EDD, she said.
In addition to the confirmed fraud, the state has stopped tens of billions of dollars in payments on bogus claims through tougher security measures, officials said.
The lawmakers noted in their letter that the state auditor last week recommended that EDD provide assistance to victims of identity theft so they can avoid tax liabilities for benefits they never received.
“We wholeheartedly agree with this recommendation, but remain skeptical about the agency’s ability to do it effectively, if at all,” the lawmakers wrote.
The concern about taxes is one more worry for many jobless Californians, including Diane Mayagoitia, an unemployed teacher from Los Angeles who saw her EDD debit card hacked in January and $5,000 in benefits stolen.
“To learn that I might owe taxes on money that I have no access to because of fraud is just one more trauma to endure, and more sleepless nights,” Mayagoitia said.
The Internal Revenue Service has recommended that taxpayers who receive Form 1099-G for unemployment benefits they did not actually get because of identity theft should contact their state unemployment agency to get a corrected form.
“Payments made as a result of these fraudulent claims went to the identity thieves, and the individuals whose names and personal information were taken did not receive any of the payments,” the IRS said in a statement.
“Taxpayers who are unable to obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received,” said the IRS guidance.
EDD has set up a tax information webpage to help people who were issued tax forms erroneously and need the problem fixed, the agency said.
“Claims confirmed as imposter fraud will be removed from the associated Social Security number, and an amended 1099-G will be provided to mitigate tax liability,” said Loree Levy, a spokeswoman for EDD.
The EDD also has a phone line for individuals with Form 1099-G questions: 1-866-401-2849.
One legislator said people have tried to call the number but not been able to reach a live representative.
“As investigations continue, some people may receive mailed forms that don’t belong to them,” the agency said in a statement. “The EDD asks these individuals to kindly mark ‘Return to Sender’ on the envelope and send it back to EDD.”
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